Economy hit hard as resources go backwards

A contraction in the mining industry, triggered by lower commodity prices, and tighter household spending more than halved economic growth last quarter, and Treasurer
Wayne Swan
admits it is becoming harder to deliver a budget surplus.

The economy expanded by 0.6 per cent in the three months ended June and 3.7 per cent from a year earlier.

The national accounts showed that falling prices for Australia’s main exports have made companies and households feel poorer.

Despite the biggest government cash handouts to families since the global financial crisis, spending growth slowed sharply and savings rose in the quarter, a sign households have been rattled by Europe’s debt crisis and weakness in China.

Treasurer Wayne Swan ... “We have sustained a decline in commodity prices that will make our budget task harder but we are absolutely committed to delivering a surplus in 2012-13.”
Photo: Glenn Hunt

Su-Lin Ong, a senior economist at Royal Bank of Canada, said the national accounts showed real net disposable income – a key measure of Australia’s wealth and a driver of living standards – grew at the weakest rate since 2001, excluding the period after the 2008 crisis.

“It all comes back to the terms-of-trade story and what it means for national income and purchasing power," Ms Ong said. “The trend is pretty clear . . . it is easing, and prob­ably falling more than the government’s base-case scenario."

Mr Swan said the economy was resilient in the face of global economic disruptions, and hinted in the strongest terms yet that the government’s Mid-Year Economic and Fiscal Outlook (MYEFO) would effectively become a mini-budget designed to protect the small $1.5 billion surplus target this financial year.

“We have sustained a decline in commodity prices that will make our budget task harder, but we are absolutely committed to delivering a surplus in 2012-13," he said.

The spot price of iron ore fell this week below $US90 a tonne, its lowest price in almost three years and 33 per cent below the price at the start of July. The fall forced Fortescue Metals Group this week to delay part of its Pilbara expansion and sack more than 1000 workers.

Ms Ong warned that the terms of trade had fallen sharply since the end of the second quarter beyond the period covered in the national accounts. “We’re up for a pretty big drop in the current quarter," she said.

Money markets predict the Reserve Bank will cut official interest rates by 0.25 of a percentage point at least twice in the last three months of 2012. The rate is at 3.50 per cent.

Treasurer Wayne Swan delivers the national accounts.

Some economists were surprised by the weakness in consumer spending during the June quarter, when the government paid $2.8 billion to people in carbon tax compensation.

Household spending growth slowed to 0.6 per cent in the June quarter from 1.8 per cent in the previous quarter. The savings rate rose to 9.2 per cent from 8.9 per cent.

Another surprise was the resources sector, which shrank 1.2 per cent, almost as bad as the 1.4 per cent decline in manufacturing, which has been hit hard by the high dollar.

Investment in machinery and equipment fell for a third straight quarter, suggesting sentiment outside the mining industry remains weak.

A rise in inventories wiped 0.3 of a percentage point from economic growth in the quarter.

Commonwealth Bank chief economist Michael Blythe said his overall impression from the figures was that the economy had respectable momentum at mid-year and was now facing more difficult times.

“There has always been something of a feeling that it was all too good to last," he said. “Every previous terms-of-trade boom ended in a bust that left prices back where they started."

He doesn’t expect the terms of trade to collapse to pre-boom levels.

Lower commodity prices meant “that some of the insulation that has protected the economy is fraying," he said.

Despite the fall in prices, Mr Swan said planned investments of $260 billion in resources projects were not threatened, and “we do expect commodity prices to remain at a historic level over the medium term".

“Unlike any of our predecessors, we’ve not only made very substantial savings in our budgets to provide room for new priorities, we’ve also done it in MYEFO,’’ he said.

Opposition treasury spokesman
Joe Hockey
said much of the economic growth in the second quarter came from government spending and falling commodity prices reinforced the budget’s weakness. “Wayne Swan must immediately come clean about how he will fill this impending black hole in his budget," he said.

Yasser El-Ansary from the Institute of Chartered Accountants Australia said: “We’re getting very close to a tipping point in the economy, where if the government cuts expenditures beyond what is already planned, we might start to see a serious dampening of momentum across a range of ­sectors that are already doing it pretty tough."